IRS Proposal Has New Revenue Recognition Rules in Mind
I know that it is tax season, and I know that we are slammed, but the IRS does this to us every year – it issues something that could be important. So, let’s start at the beginning.
I am a member of the American Institute of CPAs (AICPA), and I even write articles for them. The AICPA has an amazing tax section, and the publication that I write articles for is one of my favorite newsletters.
I am not a CPA though, so when something changes that has to do with recognition of income and expense, I usually skim the article because it doesn’t apply to me. I am an enrolled agent, and I don’t audit, review, or compile financial statements, so these types of changes don’t affect me. I don’t delve into it like I would with a tax change. However, this is a time when the rubber meets the road and our worlds collide.
In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced new financial accounting standards for recognizing revenue. The FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), while the IASB issued International Financial Reporting Standard 15, Revenue from Contracts with Customers.
So, basically, the new revenue recognition standards must be used by public companies starting in 2018, and then everyone else in 2019. This will definitely be something that I will dive into after April 18.
On March 28, the IRS issued Notice 2017-17 and requested comments on a proposed revenue procedure that, if finalized, will set out how a taxpayer may request automatic consent to change a method of accounting for recognizing income when the change is made for the same taxable year as the taxpayer adopts the new revenue recognition standards.
Comments on the proposal must be submitted by July 24.
Qualifying same-year method changes may include automatic changes for which existing guidance, including Rev. Proc. 2015-13 and Rev. Proc. 2016-29, already provides automatic change procedures. Taxpayers requesting consent for automatic changes for which existing guidance already provides automatic change procedures must use the existing automatic change procedures to make a request.
For qualifying same-year method changes for which existing guidance does not provide automatic change procedures but complies with Code Section 451 or other guidance regarding the tax year of inclusion of income, the taxpayer will be required to make the change under the proposed revenue procedure.
Now, let’s talk change of accounting methods. I hate filing Form 3115, Application for Change in Accounting Method. We are basically telling the IRS that we have never counted our income or expenses correctly and now we want to come clean and do it right.
There is a lot to a Form 3115. You must make a Section 481(a) adjustment, meaning that if the change happened in the middle of the year, you have to make sure that you didn’t duplicate entries. The whole thing is a mess. If you are going to change your method of accounting, do it Jan. 1.
There is a small business exception to Section 481(a) adjustments. A taxpayer with one or more separate and distinct trades or businesses, within the meaning of Regs. Section 1.446-1(d), that individually has (a) total assets of less than $10 million as of the first day of the tax year for which a change in method of accounting is requested, or (b) average annual gross receipts of $10 million or less for the three preceding tax years, as determined under Regs. Section 1.263(a)-3(h)(3) (substituting “separate and distinct trade or business” for “taxpayer”), would be able to make the change for each such separate and distinct trade or business on a cut-off basis.
Accordingly, a Section 481(a) adjustment would neither be permitted nor required for each such separate and distinct trade or business. (See Rev. Proc. 2015-13.)
The Internal Revenue Code provides for automatic consents for a change in the method of accounting. Rev. Proc. 2014-16 has a complete list of what gets automatic consent. Revenue recognition would be added to the list of automatic consents for the IRS.
As I said, this is something I really have to get into, but now, back to tax season craziness.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...